Trend Following with Managed Futures: The Search for Crisis Alpha

Content: Foreword Andrew W. Lo xi     Preface xv     Introduction xxi     PART I HISTORICAL PERSPECTIVES     CHAPTER 1 A Multicentennial View of Trend Following 3     The Tale of Trend Following: A Historical Study 5     Return Characteristics over the Centuries 8     Risk Characteristics over the Centuries 17     Portfolio Benefi ts over the Centuries 19     Summary 21     Appendix: Included Markets and Relevant Assumptions 21     Further Reading and References 23     PART II TREND FOLLOWING BASICS     CHAPTER 2 Review of Futures Markets and Futures Trading 27     Forward and Futures Contract Fundamentals 27     Review of the Managed Futures Industry 34     Futurization 38     Summary 43     Further Reading and References 43     CHAPTER 3 Systematic Trend Following Basics 45     The Basic Building Blocks of a Trend Following System 47     Strategy Classifi cation and Core Diff erentiators 56     Partitioning Trend Following Systems 60     Summary 61     Further Reading and References 61     PART III THEORETICAL FOUNDATIONS     CHAPTER 4 Adaptive Markets and Trend Following 65     The Adaptive Market Hypothesis 66     A Framework for Speculative Risk Taking 75     A Closer Look at Crisis Alpha 78     Summary 91     Further Readings and References 91     CHAPTER 5 Divergence and the Tradability of Trend 93     Risk versus Uncertainty 93     Convergence versus Divergence 95     Measuring Market Divergence at the Portfolio Level 106     Testing the Stationarity of Market Divergence 114     The Tradability of Trend 117     The Importance of Entry versus Exit 121     Summary 124     Further Reading and References 124     CHAPTER 6 The Role of Interest Rates and the Roll Yield 127     Collateral Yield 128     Decomposition into Roll Yield and Spot 131     Summary 138     Further Reading and References 139     PART IV TREND FOLLOWING AS AN ALTERNATIVE ASSET CLASS     CHAPTER 7 Properties of Trend Following Returns 143     Trend Following as an Alternative Asset Class 143     Crisis Alpha 145     Crisis Beta 149     Key Statistical Properties 155     Summary 159     Appendix: A Summary of Common Performance Measures 160     Further Reading and References 161     CHAPTER 8 Characteristics of Drawdowns, Volatility, and Correlation 163     Understanding the Properties of Drawdowns 163     Volatility of a Trend Following Portfolio 173     Correlation and Diversification at the Portfolio Level 181     Summary 185     Further Reading and References 186     CHAPTER 9 The Hidden and Unhidden Risks of Trend Following 187     Directional and Nondirectional Strategies: A Review 187     Defining Hidden and Unhidden Risks 188     The Myths and Mystique of the Sharpe Ratio 195     Unraveling Hidden Risks of Dynamic Leveraging 196     Summary 207     Further Reading and References 207     CHAPTER 10 Trend Following in Various Macroeconomic Environments 209     Interest Rate Environments 210     Regulatory Forces and Government Intervention 217     Postcrisis Recovery 221     Summary 228     Further Reading and References 229     PART V BENCHMARKING AND STYLE ANALYSIS     CHAPTER 11 Return Dispersion 233     Strategy Classification and Return Dispersion 234     A Closer Look at Capital Allocation and Position Sizing 239     Return Dispersion from an Investor   s Perspective 247     Empirical and Theoretical Considerations for Correlated Return Series 256     Summary 263     Further Reading and References 264     CHAPTER 12 Index and Style Factor Construction 265     Divergent Risk Taking Revisited 266     Defining a Divergent Trend Following Strategy 269     Constructing Style Factors 277     Characteristics of the Style Factors 282     Summary 286     Further Reading and References 287     CHAPTER 13 Benchmarking and Style Analysis 289     A Framework for Return-Based Style Analysis 290     Style Analysis for Individual CTA Managers 294     Sector Level Analysis of the Market Size Factor 299     Style Analysis Clarifications 304     Manager Selection and Allocation 310     Summary 313     Further Reading and References 313     PART VI TREND FOLLOWING IN AN INVESTMENT PORTFOLIO     CHAPTER 14 Portfolio Perspectives on Trend Following 317     A Closer Look at Crisis Alpha 317     The Impact of Mark-to-Market on Correlation 326     Understanding Volatility Cyclicality 329     Summary 334     Further Reading and References 335     CHAPTER 15 Practicalities of Size, Liquidity, and Capacity 337     Does Size Matter? 337     The Impact of Less Liquid Markets 345     Summary 351     Appendix: Market Symbols and Names 352     Further Reading and References 352     CHAPTER 16 Diversifying the Diversifier 353     From Pure Trend Following to Multistrategy 354     Portfolio Analysis of the Move to Multistrategy 358     Hidden Risk of Leveraging Low-Volatility Strategies 368     Summary 374     Further Reading and References 374     CHAPTER 17 Dynamic Allocation to Trend Following 375     A Framework for Dynamic Allocation 375     Mean Reversion in Trend Following Return Series 377     Investigating Dynamic Allocation Strategies 384     Summary 389     Appendix: A Theoretical Analysis of Mean Reversion in Trend Following 390     Further Reading and References 393     Glossary 395     About the Authors 407     Index 409